Rate cut welcome, but demand revival key to new investments

The cut in interest rates has reduced borrowing costs and freed up money for companies to use in capital expenditure (capex), but barring a few sectors in manufacturing such as automobiles and tyres, companies would wait and watch for an uptick in demand to press ahead with large investments.

The cut in interest rates has reduced borrowing costs and freed up money for companies to use in capital expenditure (capex), but barring a few sectors in manufacturing such as automobiles and tyres, companies would wait and watch for an uptick in demand to press ahead with large investments.

According to business leaders, the RBI’s move to reduce the key lending rate to 6.75% from 7.25% to aid consumption will take time to show effects, and the upcoming festival season when purchases of cars, consumer goods and houses typically rise, will indicate the improvement in demand sentiment.

“Today there is low demand and volumes are slow. So investment to expand manufacturing capacity is not there. The rate cut is one of the factors to stimulate demand but investment cycle will need more time,” said Seshagiri Rao, joint managing director of the JSW Group, which is expanding steelmaking capacity to 18 million tonnes from 14 million tonnes, at a cost of Rs 5,000 crore.

For starters, steel firms are looking to raise product prices.

Automobile major Mahindra & Mahindra (M&M), which has a total investment outlay of Rs 10,000 crore — Rs 7,500 crore via capex in M&M directly and Rs 2,500 crore in other companies — expects to revive its plans. “The

rate cut will spur investments. The scenario is changing from what it was a year back when interest rates were high and companies focused on product development alone while putting expansions on hold. Now that environment is slowly improving,” said VS Parthasarathy, group CFO, M&M.

Auto companies have been seeing tepid demand in the passenger vehicle segment but with the cut in auto loans and falling commodity prices, the demand for cars and tyres is set to go up.

The RPG Group, one of the largest tyre companies, has revived its Rs 5,000-crore capex plan to expand at two of its locations and is also paring down an earlier plan to increase global presence. “The intent of

the new government is good, but expectations are higher,” group chairman Harsh Goenka said. “The sentiment is however improving. We had earlier planned to increase our presence overseas from 42% to 50%. Now we would like to focus more domestically,” he added.

Harsh Pati Singhania, director of the JK Organisation and a distinct voice for manufacturing, said corporate capex would eventually revive but it would depend on factors such as ensuring competitiveness and ease of doing business. “Manufacturing has to be made profitable. Reduction in rates is one factor. Dealing with unfair imports is also important to make manufacturing viable,” he added.

A recent India Ratings report said that capex spend in 2015-16 may range between Rs 2.8 lakh crore and Rs 3.0 lakh crore, after falling to Rs 2.76 lakh crore in 2014-15, the lowest in five years. Of the projected spend, the top 20 companies may invest Rs 1.8 lakh crore to Rs 2.0 lakh crore in the current fiscal year, the report said.